Banks pay out over 60% of profits for wrongdoing

MARTIN FLANAGAN

BRITAIN’s biggest five banks have paid out the equivalent of 60 per cent of their combined profits in customer redress and fines for misbehaviour over the past three years, a report out today reveals.

It shows that major challenges remain for the sector despite those lenders’ combined profits jumping 62 per cent, or nearly £8 billion, to £20.6bn in 2014, according to the report from accountancy giant KPMG.

Banks are undergoing a once in a lifetime change

Bill Michael

Entitled “A Paradox of Forces”, the study looked at taxpayer-owned Lloyds and Royal Bank of Scotland, as well as HSBC, Barclays and Standard Chartered. It said that “customer remediation, conduct failings and fines continue to be a major issue, as costs have totalled £38.7bn – more than 60 per cent of their cumulative profits since 2011.

“Conduct costs last year were £9.9bn, just 8 per cent down from 2013, with almost half the cost relating to the ongoing cost of payment protection insurance and interest rate hedging”.

Britain’s big banks have been hit by a wave of scandals related to misconduct, what the sector often refers to as its “legacy issues”.

These also include the rigging of Libor, the rate at which banks lend to each other and that underpin transactions worth trillions of dollars, forex market rigging, money laundering and international sanctions busting.

The KMPG report says as well as profitability, bank balance sheets are in a healthier state, and that income down 12 per cent in 2014 showed they were pursuing “less risky activities”. Meanwhile, bad debts last year among the five banks studied fell 72 per cent, or £13.5bn.

However, it painted a contrast, with only the taxpayer-backed banks lifting profits last year, while earnings fell at Barclays, HSBC and Standard Chartered.

In addition, UK-based banks are not covering their cost of capital, which the report says is “an unsustainable position as the value to shareholders is eroding”.

It said none of the banks surveyed achieved a return on equity of more than 8 per cent in 2014, compared with an average 11.6 per cent in 2009 – the year after the worldwide crash.

Equally, although bad debts fell sharply last year, as a percentage of total loans and advances to customers it was still an average 3.4 per cent – double the pre-crisis level of 1.6 per cent.

“Banks are undergoing a once in a lifetime change, as they face evolving regulation, technology and society’s expectations,” Bill Michael, KPMG’s financial services chief for Europe, the Middle East and Africa, said.

“At the same time, competition is increasing as new challenger banks and peer-to-peer platforms offer customers new ways to borrow and deposit, and technology-led services such as PayPal and e-wallets change the way money is transferred and goods and services paid for.”

The report also warns that creating firewalls between retail banking and riskier investment banking, as ordered by the Banking Reform Bill, could render big British banks irrelevant on the worldwide financial stage.

Michael said: “The UK as a financial centre has largely been built on non-retail banking. If further regulation creates too many strictures on non-retail banking, the industry risks losing its global relevance.”

The report forecasts that cost-cutting in the top British banking echelons will continue.